Park National Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Park is an Ohio-based financial holding company whose principal business is banking through The Park National Bank. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest and dividend income | $74.7 | $70.5 | $148.4 | $139.2 |
| Net interest income | $64.7 | $59.8 | $129.6 | $118.7 |
| Provision for loan losses | $1.4 | $4.6 | $1.6 | $5.5 |
| Other income | $23.2 | $20.7 | $50.1 | $39.7 |
| Other expense | $52.5 | $49.6 | $106.8 | $98.5 |
| Income before taxes | $34.1 | $26.3 | $71.2 | $54.5 |
| Net income | $28.2 | $19.0 | $59.4 | $39.3 |
| Diluted EPS | $1.83 | $1.24 | $3.85 | $2.55 |
| Net interest margin, tax-equivalent | 3.81% | 3.42% | 3.84% | 3.46% |
Financial condition, cash flow and capital
- At June 30, total assets were $7.46 billion, down 1.0% from year-end 2017; loans were $5.32 billion, down 0.9%. Deposits rose 3.4% to $6.02 billion.
- Cash and cash equivalents were $146.2 million, compared with $169.1 million at December 31, 2017. For the first half, operating cash flow was $60.5 million, investing activities provided $32.4 million, and financing activities used $115.9 million; cash declined $23.0 million.
- Short-term borrowings were $216.1 million (down from $391.3 million) and long-term debt was $400.0 million (down from $500.0 million); subordinated notes remained $15.0 million. Shareholders’ equity was $755.1 million, or 10.1% of assets.
- Park and its bank subsidiary met applicable well-capitalized guidelines. At June 30, Park’s total risk-based capital ratio was 14.66% and the bank’s was 12.18%.
- Management said available funding sources provide more than adequate liquidity. These include deposits, securities, FHLB borrowing, loan sales and a $50 million revolving credit line, with $10 million outstanding at June 30.
Material changes versus comparable periods
- Net income increased 48% in Q2 and 51% for the first half year over year. Management attributed stronger net interest income primarily to higher loan yields and lower interest expense on borrowings; the tax-equivalent net interest margin expanded to 3.81% in Q2 and 3.84% year to date.
- The lower provision for loan losses boosted comparisons with 2017. First-half net charge-offs were $2.2 million, or 0.08% of average loans. The allowance was $49.5 million, 0.93% of loans, versus $50.0 million and 0.93% at year-end.
- Other expense increased 6% in Q2 and 9% year to date, led by salary, employee-benefit, equipment and professional-fee increases. The filing cites a one-time $1.1 million employee incentive paid in March and a higher company match under its salary deferral plan.
- Federal income taxes fell following the reduction in the federal corporate tax rate from 35% to 21%. The effective federal rate was 17.1% for Q2 and 16.7% for the first half, compared with 27.8% in both 2017 periods.
- Nonperforming loans were $98.9 million, versus $94.0 million at year-end and $110.9 million a year earlier. Nonaccrual loans increased to $81.1 million from $72.1 million at year-end. Total nonperforming assets were $104.6 million, down from $113.0 million at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management expected gradual interest-rate changes to have a small effect on net income; its model projected net income declines of 1.7% under a rising-rate scenario and 1.8% under a declining-rate scenario over the next 12 months.
- On July 1, 2018, PNB completed its merger with NewDominion Bank. NewDominion had approximately $329 million in assets, $278 million in loans and $284 million in deposits at June 30. Consideration was approximately $79 million, comprising about 435,457 Park shares and $31 million in cash. Purchase accounting was incomplete when the 10-Q was filed; results are included from the merger date. Park recorded $0.5 million of related expenses in the first half.
- First-half other income included a $4.2 million net gain on OREO sales, a $3.8 million unrealized gain on equity securities under newly adopted accounting rules, and a $2.3 million net loss on investment-security sales. A $4.1 million gain on one OREO sale was a principal contributor to the OREO result. Available-for-sale securities also generated a $25.8 million after-tax unrealized loss in other comprehensive income during the first half.
- Park expects adoption of the expected-credit-loss standard (CECL), scheduled for January 1, 2020, to materially increase its allowance for loan losses; management was evaluating the impact. The filing also identifies risks from credit quality, interest rates, liquidity and funding costs, regulation, competition, cybersecurity and successful integration of NewDominion.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material pending legal proceedings.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and nonperforming loans persists, and how the allowance and charge-offs develop.
- Whether loan yields and net interest margin can offset rising deposit costs and other funding pressures.
- The final NewDominion purchase-price allocation, integration costs, realized synergies and effect on capital and share count.
- How much reported earnings growth reflects recurring banking operations versus OREO gains, equity-security remeasurement and other unusual items.
- The eventual CECL allowance impact and any sensitivity to interest-rate, economic and securities-market changes.